TY  - JOUR
AU  - Mankiw,N. Gregory
AU  - Reis,Ricardo
TI  - What Measure of Inflation Should a Central Bank Target?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9375
PY  - 2002
Y2  - December 2002
UR  - http://www.nber.org/papers/w9375
L1  - http://www.nber.org/papers/w9375.pdf
N1  - Author contact info:
N. Gregory Mankiw
Department of Economics
Littauer 223
Harvard University
Cambridge, MA  02138
Tel: 617/495-4301
Fax: 617/495-7730
E-Mail: ngmankiw@fas.harvard.edu

Ricardo Reis
Department of Economics, MC 3308
Columbia University
420 West 118th Street, Rm. 1022 IAB
New York  NY  10027
Tel: 212-851-4007
Fax: 212-854-8059
E-Mail: rreis@columbia.edu
AB  - This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability.  The paper first formalizes this problem and examines its microeconomic foundations.  It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks.  When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
ER  -